Small businesses face a multitude of challenges. As an owner, you’ll spend most of your days fighting one fire after the other. While operations and customer service are essential business functions, finances are just as important. Cash is the lifeblood of any business, and unfortunately, many small business owners don’t have the time to sort out their cash position.
While you don’t have to be a financial expert, it helps to have a few basics in place when dealing with your cash flow. Once established, you’ll find that your business’ finances run smoothly. Most importantly, you won’t have to spend too much time monitoring them.
Here are 4 essential financial processes and items you must have in place.
A business emergency fund is something that gets ignored all too often. Cash is valuable for a small business, and most owners seek to put cash to work. However, by utilizing every available piece of cash, you leave yourself vulnerable to adverse economic events. For instance, you might invest the business’ cash into expansion, only for the economy to nosedive.
This will leave your business in a hole, needless to say. An emergency fund is much more than a “rainy day fund.” It’s a sum of money that will give you the ability to take more risks in your business, thereby earning you greater rewards. For instance, if there’s a risky but highly lucrative opportunity you would like to chase, the presence of a backup lump sum of cash will make the decision easy.
If anything goes wrong, you can always fall back on your emergency funds. Some owners think an emergency fund has high opportunity costs. However, when you think of these funds as an opportunity enabler, the choice becomes clear. Aim to have at least 6 months’ worth of business expenses in your bank account, preferably earning interest.
Outsource and Automate
Small business owners wear many hats and tend to be highly driven individuals. One of the downsides of these qualities is that they begin to think they ought to do everything themselves. For instance, a small business owner might think they must run operations, payroll, and maintain the books all by themselves. This is a recipe for disaster.
While you might be knowledgeable in different areas, there’s no replacement for expert help. Unless you happen to be an accountant yourself, you must hire out financial tasks to either a qualified accountant or automated software.
The good news is that accounting software these days is sophisticated enough to maintain books and even prepare statements. As a business owner, all you do is enter records of payments, expenses, receipts, and so on. The software handles the rest. If your business is growing in complexity, hiring an accountant is a great move.
Not only will they eliminate financial headaches, but they will also help you leverage government subsidies and any schemes on offer, thereby making you money. So stick to what you know best, and let professionals reduce the burden you face.
Track Working Capital
One of the reasons you must hire out financial tasks is keeping track of working capital levels. Accounting definitions aside, working capital is the amount of cash you have to meet business expenses and capital costs. Without adequate working capital, you won’t be able to run your business.
Working capital is directly affected by your cash flow and helps inform your next investments. For instance, should you invest excess cash flow back into the business, or should you use it to pay for upcoming expenses higher than the norm?
Projecting expenses and matching working capital needs to them are essential functions you must execute as an owner. While a financial professional will help you prepare the projections themselves, you must provide the inputs. After all, no one understands your business better than you.
Collecting payments is a tedious but necessary task. Not every client pays on time, and if you have enough clients like this, some payments will become overdue. All this does is reduce your cash flow and working capital.
Automating receivables tracking is a great way of reducing the time it takes your clients to pay you. When negotiating contracts, seek to limit your credit cycles. Negotiate deposits or full payment upfront if possible. While a lot depends on the economics of the business you’re involved in, seek to reduce the time it takes you to get paid as much as possible.
If your receivables are large enough, consider hiring a person to supervise invoice issual and payment collections. Pair them with software that allows your customers to raise line-level disputes to simplify dispute management. If you find your receivables constituting more than 40% of your business’ current assets, your customers are probably not paying you on time.
Intimidating, but Necessary
Handling finances might seem intimidating at first, especially if you’ve never done it before. However, as a small business owner, you must dive deep into the numbers or seek professional assistance to help you make sense of them. Once handled, you’ll find your business running smoothly and handle challenges robustly.
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